Optimal Time to Sell in Real Estate Portfolio Management

Posted: 20 Oct 2008

See all articles by Fabrice Barthelemy

Fabrice Barthelemy

Independent

Jean-Luc Prigent

University of Cergy-Pontoise - ThEMA

Date Written: October 16, 2008

Abstract

This paper examines the properties of optimal times to sell a diversified real estate portfolio. The portfolio value is supposed to be the sum of the discounted free cash flows and the discounted terminal value (the discounted selling price). According to Baroni et al. (2007b), we assume that the terminal value corresponds to the real estate index. The optimization problem corresponds to the maximization of a quasi-linear utility function. We consider three cases. The first one assumes that the investor knows the probability distribution of the real estate index. However, at the initial time, he has to choose one deterministic optimal time to sell. The second one considers an investor who is perfectly informed about the market dynamics. Whatever the random event that generates the path, he knows the entire path from the beginning. Then, given the realization of the random variable, the path is deterministic for this investor. Therefore, at the initial time, he can determine the optimal time to sell for each path of the index. Finally, the last case is devoted to the analysis of the intertemporal optimization, based on the American option approach. We compute the optimal solution for each of these three cases and compare their properties. The comparison is also made with the buy-and-hold strategy.

Keywords: real estate portoflio, optimal holding period, American option

JEL Classification: C61, G11, R21

Suggested Citation

Barthelemy, Fabrice and Prigent, Jean-Luc, Optimal Time to Sell in Real Estate Portfolio Management (October 16, 2008). Journal of Real Estate Finance and Economics, Vol. 38, No. 1, 2009, Available at SSRN: https://ssrn.com/abstract=1285506

Jean-Luc Prigent

University of Cergy-Pontoise - ThEMA ( email )

33 boulevard du port
33 bd du Port
F-95011 Cergy CEDEX
France

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